Keywords: crude oil price; dollar index; time-varying; key mediating factor negative relationship between oil prices and dollar exchange rate. How the Dollar Impacts Commodity Prices. There's normally an inverse relationship between the value of the dollar and commodity prices. If you look at a chart of the CRB index, it includes a diverse group of commodity prices against a chart of the dollar index. For example, forex traders use the close relationship between certain commodities, such as oil and copper, to trade currencies like the Canadian dollar and the.
Analyzing the current situation in the markets, we also came to the conclusion that the bulls will likely gain an additional enemy in the near future - the strengthening dollar. As you know from our previous alerts higher values of the U. For example, fuel imports for countries using other currencies become more expensive and could even limit demand. Taking the above ino account, we decided o take a closer look at the correlation between the black gold and the greenback.
Dollar Looking at the above chart, we see that higher values of the U. Such tendency we could see in the first half of and also between September and November we marked them with grey. In the first of the above-mentioned periods the level of correlation dropped significantly, but it started to grow steadily in the second period, which resulted in a strong negative correlation in the following months.
As you see on the chart, since November the U.
Crude Oil And Why The Correlation To The Dollar Is A Farce | Seeking Alpha
Additionally, the recent rebound in the U. You can see this relationship more clearly on the chart below. With the above in mind, you can ask the question: Looking at the medium-term chart, we see that the USD Index dropped to the Although currency bulls triggered a rebound in the following weeks, the combination of resistances encouraged their opponents to fight once again, which resulted in a re-test of this key support. Why this retracement is so important for the greenback?
This means that currency bears reached the most important fortress of the bulls and both opponents realize that if it is torn down, the road to the peaks and the next retracement will be open.
With this in mind, it is not difficult to understand the increased involvement of the bulls in recent days.
Relationship Between Crude Oil and U.S. Dollar in February 2018
Where did the last increases took the USD Index? It was quite bullish development — especially when we factor in the fact that this resistance line stopped the bulls at the beginning of the month, triggering a reversal and declines to a fresh low.
Yesterday, the buy signals generated by the daily indicators encouraged currency bulls to push the index higher, but the lower line of the grey declining trend channel stopped them once again, triggering a pullback.
In short, just because two events are occurring at the same time, doesn't necessarily mean there's a cause and effect relationship. The value of the dollar and the New England Patriots: The dollar typically strengthens in years when The New England Patriots have a winning season and go on to win the Super Bowl.
As we can see from the chart, the dollar had its biggest gains since in the years the Patriots went on to win the Super Bowl. As a result, we can safely conclude that there's a positive correlation between the Patriots and the dollar. As you might have guessed it, I grew up and currently live in New England. My point is simply that we need to be cautious in making correlations without supporting economic data to confirm the correlation. Does that mean currency exchange rates have no place in determining where crude oil prices might go?
Here's a great example of how to use exchange rates to determine whether crude might rise or fall, but it has nothing to do with the dollar index or whether crude is cheaper as a result of a weaker dollar. Instead, it has to do with basic economics or supply and demand. Norway is a crude oil exporter and although the country exports only a small portion of the total global output, it's a great indicator for the demand for oil and gas since energy makes up the majority of the country's exports.
Below is a chart of the Norwegian kroner to the U. As we can see, as the kroner weakened incrude oil prices fell hard. And when the kroner bounced off its lows at the end ofso too did crude.
In fact, the majority of times that the kroner has risen or fallen, crude was not that far behind. In my article from July 22ndI highlighted why I believed crude oil prices were due to rise in the future and the reasoning mostly stemmed from rising global economic growth leading to higher demand for crude. The evidence I used in the article was falling stocks and falling EIA weekly inventories. But I also highlighted the oil exports from Norway and the strengthening Norwegian currency.
Why does the Norwegian kroner strengthen even as crude oil prices rise? As companies buy oil from Norway, they must convert their local currency to U. For example, a company in Europe converts their euros to dollars to buy oil from Norway. Well then, the dollar should strengthen as a result, right? Actually no and here's why. At the end of the day, the Norwegian production facility needs kroner to pay their employees and ultimately converts the U.
Oil- Forex Correlation
In short, a stronger kroner results from increases in purchases of crude oil exports from Norway. This is why currency exchange rates are great early indicators for what the private sector is doing internationally.
In summary, please don't put much stock in the theory that the weaker or stronger "dollar" impacts crude oil prices and makes crude cheaper or more expensive. The dollar doesn't trade like a stock or bond. There are too many currencies that impact the value of the dollar. Instead, my suggestion is to look to oil exporting countries individually and check to see if their oil exports are increasing or decreasing and you should have a good idea for crude oil demand.
Next, look at the country's currency exchange rate to see if it's strengthening and oil exports are increasing simultaneously to see if crude might be on the rise. Please bear in mind, if a country's currency is strengthening, it may not always be as a result of increased demand for their exports including crude oil. There are far more factors that impact crude prices besides the dollar. Perhaps the strengthening kroner and Norwegian oil exports could be added to your list of factors, but they're only as valid as the other factors.
We must take all the factors into consideration in determining the value of crude in order to formulate a complete picture.
- Dec Market Overview
And from a risk management standpoint, please don't put much stock in a weaker dollar makes oil cheaper since history has shown, the correlation breaks down more often than not. And if all else fails, become a Patriots fan and buy the dollar. Good luck out there. If you like this article and would like to receive email alerts stay up to date on crude oil, commodities, and macro events, please click my profile page and click the "follow" button next to my name, and check the "get email alerts" to receive these articles sent via email to your inbox.
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